AQA Specification focus:
‘The difference between income and wealth.’
Understanding the distinction between income and wealth is crucial for analysing economic inequality, policy debates, and how resources are distributed within society, both nationally and globally, across generations.
Income and Wealth: Core Distinctions
The AQA specification requires students to understand the difference between income and wealth. These two terms, though related, capture different aspects of an individual’s or household’s economic resources.
What is Income?
Income: The flow of money received by an individual or household over a period of time, usually derived from wages, salaries, rent, interest, dividends, or state benefits.
Income is typically measured on a weekly, monthly, or annual basis and represents a flow variable. A flow variable is one that is measured over a period of time rather than at a single moment. For instance, a person might earn £35,000 per year in wages.
This diagram depicts the circular flow of income, showing the continuous movement of money between households and firms through consumption and production activities. It underscores the concept of income as a flow variable in economic analysis. Source
Sources of income include:
Labour income: wages and salaries from employment.
Capital income: returns on investments, such as dividends and interest.
Rental income: money received from renting property or land.
Transfer payments: government benefits, pensions, or social security payments.
What is Wealth?
Wealth: The stock of assets owned by an individual or household at a particular point in time, including property, savings, investments, and possessions of economic value.
Wealth is a stock variable, meaning it is measured at one specific point in time. For example, an individual’s total wealth might include £200,000 in property, £20,000 in savings, and £10,000 in shares.
This pyramid illustrates the unequal distribution of wealth among different social and economic classes, emphasizing the concentration of wealth at the top and the larger base representing the majority with lesser wealth. Source
Forms of wealth include:
Real assets: houses, land, and other property.
Financial assets: shares, bonds, and savings.
Physical possessions: valuable items like cars, jewellery, or artwork.
Pension wealth: the future value of accumulated retirement savings.
Key Differences Between Income and Wealth
While income and wealth are connected, their differences are fundamental:
Nature of measurement:
Income = flow over time.
Wealth = stock at a point in time.
Generation:
Income is primarily generated through current work, investments, or transfers.
Wealth is accumulated through savings, inheritance, or appreciation of assets.
Use:
Income funds daily consumption and expenditure.
Wealth provides security, collateral, and a store of value for future use.
Distribution patterns:
Income tends to be more evenly distributed than wealth, as many people earn wages.
Wealth is often concentrated among a smaller group, particularly due to inheritance and asset ownership.
Interrelationship Between Income and Wealth
Income and wealth are interlinked in several important ways:
High income allows individuals to save and accumulate wealth.
Wealth ownership generates income streams, such as dividends, rent, or interest.
Wealth can protect against income shocks, e.g., unemployment.
Persistent wealth inequality can lead to widening income inequality across generations.
This relationship means that those with high wealth often enjoy both greater income opportunities and greater financial security, reinforcing cycles of inequality.
Why the Distinction Matters in Economics
The distinction between income and wealth matters for several reasons:
Policy design: Taxation policies often treat income and wealth differently. Income tax is levied on wages and salaries, while wealth taxes (such as inheritance tax or capital gains tax) target asset transfers or appreciation.
Inequality analysis: Economists measure income inequality and wealth inequality separately, as they can diverge significantly.
Economic stability: Wealth cushions households during downturns, while low income without wealth makes households vulnerable to poverty.
Measuring Income vs Wealth Distribution
Economists use a range of tools to analyse how income and wealth are spread across society. These include surveys of household resources and statistical measures. While this subsubtopic does not require detailed knowledge of the Lorenz curve or Gini coefficient (covered later in the syllabus), it is important to recognise that income inequality and wealth inequality may present different pictures of economic disparity.
Practical Examples of the Distinction
To illustrate how income and wealth differ:
A graduate earning £40,000 per year but with no savings or property has high income but low wealth.
A retired homeowner with a paid-off house worth £400,000 and £100,000 in investments but receiving a small pension of £12,000 per year has low income but high wealth.
These contrasting examples highlight why policymakers and economists must distinguish clearly between the two concepts when designing interventions to reduce poverty or inequality.
Summary Points on Key Distinctions
Income is a flow, while wealth is a stock.
Income funds consumption; wealth provides security and generates further income.
Wealth is generally more unevenly distributed than income.
Understanding both is essential for analysing inequality and informing government policies.
FAQ
Flow variables, like income, measure activity over a period of time, while stock variables, like wealth, represent a quantity at one moment.
Recognising the difference prevents confusion when analysing data and ensures accurate interpretation of economic performance and inequality. It also helps policymakers design measures targeting either short-term income flows or long-term asset holdings.
Yes. A retired person may own property and investments (high wealth) but receive a small pension (low income).
Conversely, a young professional may earn a high salary (high income) but have few savings or assets (low wealth). These cases highlight why measuring both is vital to understand living standards.
Wealth is frequently accumulated through:
Inheritance across generations
Ownership of appreciating assets like property
Limited access to capital markets for most households
Since only a smaller group of people hold significant assets, wealth tends to concentrate more heavily than income.
Wealth provides collateral for loans, enabling investment in business or education.
It also allows households to withstand financial shocks, maintain consumption during unemployment, and pass advantages to the next generation through inheritance.
Income inequality shows how resources are distributed in the short term, while wealth inequality highlights long-term disparities in asset ownership.
Looking at both measures provides a fuller picture of economic disparity, since households may appear well-off under one measure but disadvantaged under the other.
Practice Questions
Define the term wealth and explain how it differs from income. (2 marks)
1 mark for a correct definition of wealth: e.g., stock of assets owned by an individual or household at a point in time.
1 mark for identifying the difference with income: e.g., income is a flow over time, whereas wealth is measured at one point.
Discuss why wealth is generally more unevenly distributed than income in an economy. (6 marks)
1–2 marks: Basic statements that wealth is more unevenly distributed due to inheritance or asset ownership.
3–4 marks: Clear explanation of factors such as intergenerational transfers, asset appreciation, and fewer opportunities to accumulate wealth compared with earning income.
5–6 marks: Well-developed discussion showing understanding of wealth concentration at the top, reference to income allowing wealth accumulation, and recognition of inequality patterns across society.
